Russia is the main backer of Georgian separatists in the two enclaves of South Ossetia and Abkhazia, and has a "peacekeeping force" stationed in the region.
Russia's three main news agencies said a Russian military convoy had entered South Ossetia on Friday, quoting witnesses.
Their reports came shortly after about 50 heavy Russian tanks, trucks and troops were seen by Western journalists travelling from North Ossetia towards South Ossetia.
Georgia's national security council warned that Moscow and Tbilisi would be in "a state of war" if the reports of a Russian military convoy entering South Ossetia proved true.
Saakashvili's remarks came after Georgian tanks launched an attack on Friday on Tskhinvali, the capital of South Ossetia, according to Russia's Interfax news agency.
Simultaneously, Georgian fighter jets attacked separatist positions in South Ossetia, Interfax news agency quoted the head of Russian forces in the region as saying.
Saakashvili said: "A full-scale aggression has been launched against Georgia [by Russia]. Georgia will not yield its territory or renounce its freedom," he said.
He also announced a full military mobilisation with reservists being called into action.
|Georgian troops have surrounded Tskhinvali, the S Ossetian capital
Martin McCauley, a London-based Russia analyst, told Al Jazeera: "You can argue that the president of South Ossetia, who wants independence from Georgia, is deliberately provoking Tbilisi and is trying to suck Russia in."
Dmitry Medvedev, the Russian president, promised on Friday to defend Russian citizens in South Ossetia.
"We cannot allow the deaths of our countrymen to go unpunished. The guilty parties will receive the punishment they deserve," he said in televised remarks.
For his part, Vladimir Putin, the Russian prime minister, spoke of retaliation and pledged to protect Russian citizens.
Putin, on a trip to Beijing to attend the Olympics opening, did not specify the retaliatory action.
Most residents of South Ossetia and Abkhazia have Russian passports.
An open war could prompt Russia to send in more forces under the claim of protecting its citizens.
The European Union said on Friday it was "very concerned" at the escalation of violence, a European diplomat said.
"We are very concerned by the dramatic escalation of the situation," the diplomat told the AFP news agency.
Meanwhile, the Security Council failed to agree early on Friday on a statement drafted by Russia that would have called on Georgia and its separatist region in South Ossetia to immediately put down their arms.
"The Security Council is not yet in a position to express itself on the situation," Jan Grauls, the Belgian ambassador and the council president for August, said.
There were no immediate plans for the council to take up the matter again.
The council concluded it was at a stalemate after the US, Britain and some other members backed the Georgians in rejecting a phrase in the three-sentence draft statement that would have required both sides "to renounce the use of force", council diplomats said.
Jonah Hull, reporting for Al Jazeera from the South Ossetian border with Georgia, said there had been a fairly sustained aerial bombardment of villages thought to be South Ossetian outposts.
But he said the situation was calm after the bombing.
"There is a lull in the bombardment that has been ongoing overnight and throughout the morning," he said.
|A resident of a village taken over by Georgia celebrates [Reuters]
"I spoke to the Georgian interior ministry spokesman who said the lull was designed to allow civilians to escape from the city of Tskhinvali. We have no idea at this point how many civilians are trying to flee or indeed where they are going."
Hull said he had seen jets in the air that "look like Georgian jets and there are reports coming in from the Georgian side that Russian jets have been in the air over Tskhinvali and have dropped bombs on the Georgian positions".
But he said that he could not confirm these reports.
Villages taken over
Lado Gurgenidze, Georgia's prime minister, said on Friday that Georgia will continue its military operation in South Ossetia until a "durable peace" is reached.
"These actions will continue until we manage to reach a durable peace because people are still in danger," he said.
General Mamuka Kurashvili, the head of Georgian peacekeepers in the region, said in comments broadcast on Georgia's Rustavi-2 television network: "We were forced to restore constitutional order in the whole region.
"Despite our call for peace and a unilateral ceasefire, separatists continued the shelling of Georgian villages."
"As soon as a durable peace takes hold we need to move forward with dialogue and peaceful negotiations."